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Treasury and Municipal Bonds

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A) Why banks hold Treasury bills and municipal bonds in their investment accounts. Why do they hold few corporate securities?

b) Why the U.S. public has not accepted the concept "The free market is the best regulator of business" for regulating depository financial institutions. (In other words, why is there much less opposition to bank regulations as compared to possible regulation of, say, the automobile industry or the fashion industry?)

c) Why is the common bond definition important to competing bankers? To credit unions? Does it have any relationship to the risks faced by credit unions? (Note that the issue of what is the common bond between the members of credit unions has recently been in the courts and Congress.)

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A. There are two reasons. First, T-bills and municipal bonds are the closest real-world equivalent to having no risk. Conversely corporate securities have very high risk, which is not suited to a commercial bank's structure (they need to have very predictable assets). Second, T-bills are often sold at ...

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